Is It The Right Time To Look At The Centamin Stock (CEY)?

Overview

Centamin PLC (Ticker Symbol: CEY) is a St Helier, Jersey-based mineral exploration, development and mining company which was incorporated in the year 1970. The company primarily explores for gold ore deposits, and its principal asset is the Sukari Gold Mine, which started operation in 2009. The base case production of the mine is c. 500,000 ounces per annum, with a potential to increase production. The company is listed on the Toronto and London Stock Exchange and is a constituent of FTSE 250 index.

Management

Joseph El-Raghy has been the Chairman of the company since August 2002. The current Chief Executive Officer is Andrew Pardey. Ross Jerrard holds the responsibilities of the Chief Financial Officer. [optin-monster-shortcode id="wxhmli4jjedneglg1trq"]

Segments

The company differentiates its segments geographically. The segments are Egypt, Côte d'Ivoire, Burkina Faso and Corporate. The company also distinguishes between the mining of precious metals, which primarily takes place in Egypt, and exploration for precious metals, which mostly takes place in West Africa.

Key Financial Metrics (FY18, in $m)

(Source: Company Filings)

Key Financial Highlights (FY 2018)

• The company reported revenue of $603.2 million, a year-on-year decrease of 11%. The decline in revenue was driven by a 10% decrease in gold sales of 484,322 ounces. The average realised gold price remained unchanged at $1,267 per ounce.
• The EBITDA saw a decline of 17% to $257.9 million in FY2018. The fall was mainly because of reduced production volume and the rise in costs of operations.
• Profit before tax decreased by 26 per cent to $152.7 million in FY2018 from $207.4 million in FY2017.
• Basic EPS was 6.5 US cents, reflecting a 22 per cent decrease year-on-year. The primary reason behind the decline was the scheduled ratchet of profit share mechanism from July 2018 from a 60:40 ratio to 55:45 in the Sukari Gold Mine.
• The net cash from operations fell by 34 per cent in FY2018 to $223.4 million, due to decreased productions and a 7 per cent rise in mine production costs from increased volumes of material moved.
• The free cash flow fell significantly by 56 per cent year-on-year to $63.4 million. This was driven by reduced production volume and scheduled change in profit sharing.
• In line with the company policy, a final dividend of 0 cents per share was proposed, bringing 2018 final dividend to 5.5 cents per share.
• In FY18, cash and liquid assets decreased by 23 per cent to $322.3 million as compared to $417.9 million reported last year.

Ratios

(Source: Thomson Reuters)

Ratios Commentary

• In the third quarter of FY2018, the gross margin decreased to 21.5 per cent and was less than the industry median. The reported gross margin was significantly down as compared to the corresponding period of the last year.
• Though the EBITDA margin of the company decreased, it is still above its peers.
• The operating margin has been consistently above the industry, reflecting lower operating expenses of the company than its competitors.
• The liquidity position of the company is significantly better than the industry. The quick ratio and current ratio improved further in the third quarter of FY2018.
• A firm's equity backs a higher proportion of assets. The company does not have any debt on its books.

Share Price Commentary

• At the closing of 4th March 2019, CEY shares closed at GBp 89.10, down by 1.89 per cent against its previous day closing price.
• Stock's 52 weeks High and Low is GBp 166.90/GBp 74. At the closing price, the share was trading 46.61 per cent lower than its 52w High and 5.15 per cent higher than its 52w low.
• Stock’s average traded volume for 5 days was 11,292,956.20; 30 days - 7,513,453.23 and 90 days - 6,227,766.47. The average traded volume for 5 days was up by 50.03 per cent as compared to 30 days average traded volume.
• On the valuation front, the stock was trading at a trailing twelve months PE multiple of 18.21x.
• The company’s stock beta was 1.00, reflecting relatively same directional movement of stock with the index.
• Total outstanding market capitalisation was around £1.03 billion and a dividend yield of 4.71 per cent.

Risks and Prospects

• The Sukari gold mine at present is the company’s main and sole mineral resource. Near term production and revenue is expected to be generated from this mine only. Until production in other mines is initiated, the potential impact remains high.
• The company’s financials are largely impacted by the price of gold, over which the company has no influence. However, the group manages its exposure to gold price by keeping operating costs as low as possible.
• The company primarily operates in Egypt, which is subject to civil and military disturbance, putting its operations in grave risk.
• Keeping in mind economic and political turbulence across the world, gold is likely to play its part as a safe haven. This can help the company to improve its revenue and increase production to match demand.

Conclusion

The investors were disappointed by the company’s guidance for the 2019 production of gold; it expects to produce 490,000 to 520,000 gold ounces. The company also expects higher input costs which can lead to strain on the financials. However, on the up-side, the company’s balance sheet remains strong with no debt and high cash-in-hand, allowing it to continue investing in future growth. At the current trading levels with stock hovering around its 52w low, the market can keep a cautious watch on the Centamin Plc stock going ahead.